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Quotable (#30)

At Real Clear World, John Minnich puts the Xi Jinping anti-corruption campaign into a broader context:

… in the next few years, China faces inexorable and potentially very rapid decline in the two sectors that have underpinned economic growth and social and political stability for the past two or more decades: exports and construction. And it does so in an environment of rapidly mounting local government and corporate debt, rising wages and input costs, rising cost of capital and falling return on investment (exacerbated by new environmental controls and efforts to combat corruption) and more. Add to these a surge in the number of workers entering the workforce and beginning to build careers between the late 2010s and early 2020s, the last of China’s great population boom generations, and the contours emerge of an economic correction and employment crisis on a scale not seen in China since Deng came to power.

The solution, it would seem, lies in the Chinese urban consumer class. But here, once more, time is China’s enemy. Chinese household consumption is extraordinarily weak. In 2013, it was equivalent to only 34 percent of gross domestic product, compared to 69-70 percent in the United States, 61 percent in Japan, 57 percent in Germany and 52 percent in South Korea. In fact, it has fallen by two percentage points since 2011, possibly on the back of the anti-corruption campaign, which has curbed spending by officials that appears to have been erroneously counted as private consumption. There is reason to believe that household consumption is somewhat stronger than the statistics let on, but it is not nearly strong enough to pick up the slack from China’s depressed export sector and depressive construction industries. China’s low rates of urbanization relative to advanced industrial economies underscore this fundamental incapacity.

Whatever the Chinese government’s stated reform goals, it is very difficult to see how economic rebalancing toward a consumption- and services-based economy succeeds within the decade. It is very difficult to see how exports recover. And it is very difficult, but slightly less so, to see how the government maintains stable growth through continued investment into housing and infrastructure construction, especially as the real estate market inevitably cools. This leaves us with a central government that either accepts economic recession or persists in keeping the economy alive for the sake of providing jobs but at risk of peril to its reform initiatives, banks and local governments. The latter is ugly and very likely untenable under the current political model, which for three decades has staked its claim to legitimacy in the promise of stable employment, growth and rising material prosperity. The former is absolutely untenable under the current political model.

[…]

Xi knows this. He and his advisers know China’s virtually insurmountable challenges better than anyone. They know how little time China has, how fragile the Party’s political legitimacy — its claim to the Mandate of Heaven — has become over the past three decades and how great the consequences of inaction will be. But they also know how much potentially greater are the consequences of failure. Knowing all these things, they are acting to reconstitute the Party one cautious step at a time.

I don’t know, that seems to be the dominant script, as far as I can see. My sense of it (limited) is that — while a real phenomenon — it tends to be hugely exaggerated, unsurprisingly given its intrinsically spectacular character. Governments waste so many resources that building a few unwanted cities scarcely scratches the budgetary paint.